Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Suppose the risk premium on the market portfolio is 9%, and we estimate the beta of Dell as bs = 1.3. The risk premium predicted
Suppose the risk premium on the market portfolio is 9%, and we estimate the beta of Dell as bs = 1.3. The risk premium predicted for the stock is therefore 1.3 times the market risk premium of 9% or 11.7%. The expected return on Dell is the risk-free rate plus the risk premium. For example, if the T-bill rate were 5%, the expected return of Dell would be 5%+(1.3*9%) = 16.7%.
a. If the estimate of the beta of Dell were only 1.2, what would be Dells required risk premium?
b. If the market risk premium were only 8% and Dells beta was 1.3, what would be Dells risk premium?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started